China
China has been hurting tremendously from a global slowdown with its powerful export industries choking under the weak demand. While we had predicted that China would slowdown, the signs are now becoming increasingly apparent around the globe. China is one of the biggest mysteries for investors and economists with most data emanating from China rated suspect even by the Chinese leaders themselves. Therefore people are equally divided in saying that China will grow at the same double digit rates while others predict a massive crash. Signs of a sharp slowdown in the Chinese economy and industries are becoming increasingly apparent shifting the argument in favor of the second camp. Note copper inventories are rising rapidly and shipping has been in a slump since the last 2 years.
The decline followed the Shanghai gauge’s descent below 2,000 for the first time since 2009. 7 Days (SVN) Group Holdings Ltd. surged to a four-month high after China’s second-biggest budget hotel owner got a buyout proposal from a group of private equity firms.
The People’s Bank of China has reduced interest rates twice this year and said on Sept. 17 it will focus (FMCN) on price stability as policy makers seek to revive the economy. Standard & Poor’s cut the outlook for Chinese growth in 2012 by half a percentage point to 7.5 percent this week. The median estimate of economists surveyed by Bloomberg is for expansion to slow to 7.4 percent in the third quarter, from 7.6 percent in the second.
Reasons for a Chinese Economy Hard Landing
- Real Estate is a Bubble – The Chinese real estate is in a bubble with real estate prices growing far in excess of Chinese income levels. Though the real estate is not driven by a debt fueled boom like the US and other developed countries, nonetheless average real estate prices/ average income levels would suggest that the real estate prices are poised to come down sharply. Chinese authorities are using both monetary and non-monetary tools to bring sanity to this market.
- US and European Export markets are slowing down – China’s growth has been export driven, like those of other Asian Tigers. However its main export markets of Europe and US are going to see sub-par growth in the next few years due to a debt driven excess. Europe’s Austerity measures and a low Euro is not an ideal situation for China’s export industries.
- Pressures on Yuan growing – China is facing an ever increasing chorus from countries around the world to appreciate the yuan which is artificially suppressed through currency controls. Some think tanks suggest that the yuan is 40% undervalued to its fair value against the dollar. With countries seeing their domestic markets shrink, everyone wants to export more and import less to repower their economies. An undervalued yuan is a trigger for trade wars.
- Foreign MNCs feeling discriminated against – China’s protectionist policies has led to alienation amongst the foreign companies doing business in the country. Rio Tinto’s much publicized China corruption case and the Google abandonment of China has brought this issue into the limelight. Foreign countries are re-evaluating whether China’s huge market is worth the discrimination they face vis-a-vis domestic companies.
- Banks and Local Government have huge unaccounted liabilities – China’s corporate structure runs large based on patronage networks of government owned banks, state owned companies and provincial authorities. This frequently leads to misallocation in capital which shows up in the forms of NPAs. Local Governments compete with each other for projects giving out huge subsidies and incentives which are funded mainly through local land sales. With real estate prices crashing and profits of export industries being pressurized, this is another bubble that may crack.
- Chinese Stock Market is down the most among major markets in 2010 – The Chinese stock market has been the worst performer among major economies with the interest rate increases and real estate bubbles making investors wary. Note this by itself is a poor indicator of economic health as stock markets are generally poor predictors of economy in the short run.
- Chinese wages are going up – There has been a lot of social unrest and suicides in China as wages fail to keep in sync with the rising productivity. Suicides at Electronics Giant Foxconn and strikes at Honda are indicative of this trend. Low wages which are China’s biggest competitive advantages may no longer remain one for much longer.
China’s export-focused solar panel industry has been slammed by excess manufacturing capacity that created a glut and forced companies to slash prices. Major solar panel makers such as Trina Solar Ltd (TSL.N) and LDK Solar Co Ltd (LDK.N) have recently announced plans to slash jobs.
A European Union’s decision to launch an anti-dumping investigation on Chinese solar panel exports has also weighed on sentiment in the sector.
Baoshan Iron & Steel Ltd. suspended production at a plant making products for the shipbuilding and oil industries, a sign of the pressure that China’s economic slowdown is putting on the world’s largest steel sector.The decision by China’s largest publicly traded steelmaker regarding its Luojing complex in Shanghai marked a retreat for a company regarded as one of China’s best-run steelmakers.Sharply falling steel prices have triggered widespread output cuts and a string of dismal earnings at mills.
Cotton consumption in China, the world’s largest user, may shrink 11 percent this year as a deteriorating economy hurts demand and causes a buildup in commodities, according to Weiqiao Textile Co. (2698) Futures fell.
“The Chinese economy is only at the beginning of a harsh winter,” Zhang Hongxia, chairman of China’s largest cotton- textile maker, said in an interview in Hong Kong on Aug. 20. “China now is facing a situation where everything from coal to steel inventories are piling up.”
With economic growth now slowing and property investment weak, demand is bound to be soft. Analysts at Credit Suisse expect China’s copper usage to grow by just 2 per cent this year and 1 per cent in 2013, in contrast to the 26 per cent growth seen at the height of China’s stimulus effort in 2009.
This gaping discrepancy between apparent demand and actual consumption implies there has been a massive build-up in unreported stocks of refined copper held in bonded warehouses and elsewhere.
Appalachia Miners getting Fired
Slowing growth in China is taking a brutal toll on Appalachian coal mines and coal towns.Appalachia has one of the world’s richest deposits of high-grade coal used to make steel. Thanks to Chinese demand, the price for premium metallurgical coal, whose low-ash and low-sulfur content makes it ideal for steel making, hit a record $330 a metric ton in early 2011.Slowing growth in China is taking a brutal toll on Appalachian coal mines and coal towns.Appalachia has one of the world’s richest deposits of high-grade coal used to make steel. Thanks to Chinese demand, the price for premium metallurgical coal, whose low-ash and low-sulfur content makes it ideal for steel making, hit a record $330 a metric ton in early 2011.China couldn’t seem to get enough metallurgical coal to feed its steel making industry. In 2009, U.S. met coal exports to China grew nearly six-fold, and grew by the same rate in 2010, linking Appalachia more closely to the global steel trade.
Barbecues get cut in Australia
Google+Times are tough for miner Fortescue Metals Group Ltd. So much so that even the company’s barbecues, a quintessential part of Australian culture, aren’t safe from spending cuts.The world’s fourth-largest iron-ore producer no longer will fund barbecues for employees at its Anderson Point export facility in Port Hedland, Western Australia, according to an internal memo reviewed by The Wall Street Journal.If that wasn’t harsh enough, even ketchup and steak sauce are being shelved
